There are many CFD strategies that have been tried and tested by stock market gurus, each with their own benefits and risks. Once you have mastered these trading tips, you can apply them to options as well, because they are more similar to CFDs than most other instruments.
In particular, selling call options is an investment strategy that’s likely to amplify your returns. Detractors point to the fact that you are limiting your upside and taking away the flexibility of being able to sell when it pleases you. While these are valid concerns, the main mitigating factor is this: selling call options against stocks that you already hold is guaranteed cash, immediately.
Selling call options – the benefits
The advantages do not end there:
Selling call options – the drawbacks
Of course, no plan is absolutely perfect or without its downsides. There is a sum total of two disadvantages to selling call options worthy of note:
These drawbacks exist, but you are certainly not cornered or locked in.
If market sentiment turns for the worse and the underlying shares stop being attractive, you have at least already collected a premium that cushioned the blow by the per-share amount collected initially. If you want to exit early, all you have to do is buy back the calls in a closing transaction at a profit, before exiting the position.
Call writing – the key rule
So, when it comes to an IRA or any other account, what is the fundamental rule to adhere to? The important thing is to only sell calls at a price point where parting with your shares would still make sense, and not leave you dissatisfied.
The effect of what you’re trying to do is to have a price equal to the strike price selected, and add on any per share premium received.
For example, if you sell a nine-month $60 call on a $51.50 share for $4, your ‘called away’ sales price would be $64, if you exercise it later. This yields more than a 24% positive movement from the start of trading on this call.
Yes, the stock could ultimately gain more than 24%. But would it really have been a disaster to ‘only’ make 24% on that stock? In most cases, no.
Covered call writing is one of those trading strategies that you must have saved and at least resorted to now and then in your big picture investment plan. When you can call in cash on demand, it significantly lowers risk and allows you to purchase more shares – such as the hot pick of stocks you’ll want to own – not with your own cash, but with the cash of others. That’s a big double win as far as investing goes. It is no small wonder then that some pros will happily attest to selling call options as their go-to default more often than not.